December 15, 2008
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News: Charge-offs Charging Forward.
Fitch Retail Credit Card index reports that charge-offs are still on the rise and worse times are mounting. Uncollectible credit card debts rose again this month, as more jobs are lost and the economy continues to worsen. While lenders are stridently cutting back credit card lending and consumers are scaling back on buying, the retail industry is heading into its own woes. Even the branded credit divisions have been drawn into the soup. Store-issued credit card accounts are also going into default. Predictions are, according to Fitch, that as many as one card holder of every eight will be in default by 2009.
Of the four major delinquency categories, the third is usually the most telling. That would be those credit card holders who have continued into delinquency for the third time in a row (between 60 and 90 days). Each successive delinquency increases charge-off probability considerably but the third one creates a solid pattern. In the case to branded credit cards (issued by a retailer), the increase of delinquencies in this category since August has jumped almost 24 percent.
Of course, charge-offs are the most serious because credit card debt at that point becomes uncollectible. That rate is already seriously high with a 9.1 percent charge-off rate. But, according to Fitch, this figure is expected to climb to 12 percent by mid-2009. That's so bad, it represents a 40 percent increase over that of 2007. These figures, by the way, are similar to those for the standard credit card industry.
On the hedging side, these high charge-off ratings do not spell bust for the credit card industries. What are called ‘spread-levels' are buffeted from of the storm by portfolio yields arising from the higher interest rates that are in place. These higher rates serve to bolster the spread against the higher charge-off rates.
The projections from Fitch are determined by tracking over $72 billion worth of principle receivables and back $40 billion of private label credit cards (from retailers).